In the wake of Barclays Bank admitting to manipulating Libor (the London Interbank Offered Rate, used by banks to set the interest rate they charge when borrowing from one another), other financial institutions are now on notice over their involvement. Some banks artificially inflated or deflated their rates, depending on what would benefit them most.
Jeff Grange, Senior Vice President & Head of Professional Lines for specialty underwriter Torus, spoke with NU about how the scandal will affect the professional-services insurance market for financial institutions.
Examining the Libor scandal, what exposures are insurers most concerned about?
We are seeing a widespread series of informal and formal regulatory investigations against the implicated banks and investment institutions. One level is the regulatory and compliance exposure, which is substantial and rapidly proliferating.
Even in the early stage of this, insurers are concerned with the wide spread of the investigation and the regulatory costs. The investigation may implicate the directors and officers as well as the banks themselves.
What coverage do most banks purchase?
All of the money-center banks purchase Side A D&O coverage [covering the individuals]. Most will try to purchase traditional A, B and C D&O coverage [with Side B, the company indemnifies the individuals and is reimbursed. Side C covers the institution itself].
Most will have some [Errors & Omissions] coverage, but few will have investment-banking E&O coverage. Because of past financial scandals, the availability of investment-banking E&O [became limited]. Many of the large, global-center investment banks were no longer able to buy it.
Could this scandal make the Professional Liability market more constrained?
The short answer is yes. It is fair to say that in terms of large financial institutions, there has already been a firming pricing trend that goes through 2008, 2009 and 2010. If the market was firming before, I think it is likely, going into 2013, to be quite hard or hardening.
Could increased rates draw in new capital and keep the increases at bay?
The potential of systemic risk in the class certainly puts a brake on markets rushing in to fill a void in the pricing. The fear factor is pretty high, and people are very leery of the class—with good reason.
Are there any capacity issues today?
I think affordability for large money-center banks is getting more expensive, and I think the availability of capacity is waning. There will be less [capacity] in 2013, and it will be more expensive. It won't be a favorable market for the buyer.
Will the D&O market as a whole be impacted?
Yes. The large financial institutions are the biggest buyers of D&O. When dealing with a global-center bank, you are taking most of the capacity. As carriers pull back from [financial institutions], I think there will be less capacity for D&O.
Is this primarily a London issue, or is this a global problem?
It is clearly the latter. Although the nexus seems to be in London, the banks that are implicated are global money-center banks. This will be very much a global problem.
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